The NFT industry gained significant traction in 2021, driven by a craze for digital art that has infiltrated the world of celebrities and entertainment. In the first half of 2021, sales reached $2.5 billion, compared to $13.7 million in the second half of 2020..
However, almost as soon as NFTs began making headlines, the backlash from concerned environmental campaigners began, citing the energy expenditure involved in NFTs and associated transactions. As long as NFTs are based on proof-of-work blockchains, this will be a major black mark against them, but adopting a different protocol – such as Geeq’s lightweight proof-of-honesty blockchain – could solve that problem. However, from the corporate perspective, and particularly through the ESG lens, any new technology must add demonstrable value.
NFT, an industry under observation
Over the last two years, there has been a sea change in the global agenda. The pandemic has undoubtedly played a part, but there are other forces at work. The latest IPCC report issued the starkest environmental warning yet; a “code red for humanity” that establishes a firm connection between human activity and the increasing incidence of extreme weather events. Meanwhile social and humanitarian issues are also gaining prominence, from the Black Lives Matter protests to recent events in Afghanistan.
As a result, the environmental, social, and governance (ESG) agenda is becoming the most critical priority in boardrooms around the globe. The EU Sustainable Finance Disclosure Regulation aims to make it more difficult for investors to engage in so-called “greenwashing,” and the US looks likely to follow. At the same time, ESG is increasingly included as a key factor in evaluating investments. Under increasing pressure from investors and stakeholders, executives are framing every decision in terms of the question, “How will this impact our ESG profile?”
In the context of NFTs, there are several areas where they can be applied in various industries as a force for good, underscoring existing ESG efforts.
NFTs offer significant potential to level up blockchain’s established role in supply chains. IBM’s permissioned network Food Trust is already credited with reducing waste and increasing transparency across the agricultural supply chain, from small-scale producers to major supermarkets. However, whereas one lettuce is arguably more or less the same as another, there are some industries where it is either necessary or desirable to put a unique stamp on an item, and that’s where NFTs can play a part.
One use case already being explored is in the luxury goods markets, where NFTs can be used as a unique certificate of ownership and authenticity. For example, last year, Swiss watch manufacturer Breitling started issuing NFTs as unique digital passports to accompany its watches.
Using NFTs in this way is one way to combat the issue of counterfeiting. Fake goods are expected to cost the global economy $2.3 trillion in 2022, but the implications are far more dramatic and unpleasant than loss of profits, or even jobs: counterfeiting is built on brutal child labor and human trafficking practises, and closely linked to organized crime and terrorism.
Another example is in the automotive sector, where unique NFTs could be used to represent ownership of a specific vehicle. Again, this is about far more than just financial loss: such a practice could help to combat issues such as car cloning, where criminals steal the identity of a legal vehicle in order to hide the identity of another, often stolen vehicle, so that it can be sold or used in criminal enterprises.
Taking it a step further, it would be feasible to introduce NFTs into the manufacturing process to represent specific parts. For example, catalytic converters are often targeted by thieves for their high-value precious metals. Ultimately, it’s feasible that the end NFT representing a car could be a wrapper for all of the other NFTs representing parts of the finished vehicle. Supporting the elimination of fraud and criminal activities is a matter of robust industry governance, thereby offering a tangible contribution to the ESG agenda.
Reducing Environmental Impact
The fashion industry is renowned for having one of the worst records when it comes to environmental sustainability, consuming 1.5 trillion liters of water each year and accounting for 10% of global carbon emissions. We’re also extremely wasteful when it comes to clothing, with only 15% being recycled.
NFTs offer various opportunities to address the sustainability challenges facing the fashion industry. Firstly, NFT-based items of digital apparel are finding audiences among the digital-forward millennial and GenZ populations, for whom fashion is as important in their online and gaming lives as it is in the real world. Digital fashion project RTFKT sold $3.1 million of NFT sneakers earlier this year and went on to secure $8 million in funding from Andreessen Horowitz.
Digital fashion may seem like a reach, but remember that fashion functions to communicate status – and now that so many interactions are moving online, status too is displayed differently. NFT-based digital fashion is also likely to appeal to investment-focused collectors. Digital fashion isn’t just more sustainable, it’s easier to store, more difficult to steal, and won’t degrade over time. NFTs offer a significant opportunity for fashion brands to make a dent in their sizable environmental footprint by focusing on digital product lines.
Charities are honing in on NFTs as a way of raising both awareness and funds. Organisations from cancer charities to corporations are auctioning an array of NFT art and other tokenized assets, and Binance has established the platform NFT for Good to “advance sustainable global development”. (The first projects focus on Covid-19 and sex education in China.)
Since charities rely heavily on corporate sponsors and celebrity brand ambassadors, there’s a significant opportunity for enterprises to enhance their social agenda by using NFTs as a channel for charitable donations. One of the highest-profile examples to date is Twitter CEO Jack Dorsey tokenizing his first tweet, which subsequently sold for $2.9 million. Dorsey donated the funds to help low-income families in Africa impacted by the pandemic.
The focus on ESG topics isn’t going away any time soon. If businesses devote some creativity to exploring NFTs’ various applications, this innovative technology can advance from being a niche novelty to demonstrated value added in terms of sustainability, social commitments, and robust industry governance.
Stephanie So is an economist, policy analyst and co-founder of Geeq.
Throughout her career, she has applied technology within her specialist disciplines. In 2001, she was the first to use machine learning on social science data at the National Center for Supercomputing Applications.
More recently, she researched the use of distributed networking processes in healthcare and patient safety in her role as a Senior Lecturer at Vanderbilt University. Stephanie is a graduate of Princeton University (A.B.) and the University of Rochester (M.A., M.S., Ph.D.).